Financial markets can be challenging to understand. And when markets enter a “bad news is good news” cycle, it becomes even more challenging to follow along.
Stock prices rallied at the end of April after the Commerce Department reported that first-quarter gross domestic product (GDP) rose at a 1.1% annualized rate. That was well short of the 2% that economists were expecting.1
Then, a few days later, the financial markets shrugged off news that a regional bank was rescued by federal regulators and was acquired by a multinational U.S. bank. It was the third bank issue in the past 60 days.2
So why would stocks rally on a bad GDP report and news of another bank being closed?
With the GDP report, Wall Street concluded that despite the lower-than-expected number, the overall report showed the consumer was still spending, so the “bad news” had a “good news” silver lining. Remember, consumer spending accounts for about 70% of total economic activity.3
With the regional bank, the markets focused on the good news from the winning bidder, which expressed confidence that the regional bank crisis was ending.2
If you respond, “that’s nonsense,” you’re not alone. When the market enters a “bad news is good news” cycle, it can be difficult for even the most seasoned investors to anticipate how markets will react to any economic update or news event.
1. CNBC.com, April 27, 2023. “U.S. GDP Rose at 1.1% Pace in the First Quarter as Signs Build that the Economy Is Slowing”
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